Sterling posted net gains as inflation data reinforced expectations of a December rate hike with GBP/EUR close to 20-month highs.

Consolidation was the overall market theme during Wednesday with relatively narrow ranges prevailing. Markets continued to monitor global inflation developments and central bank policies.

US bond yields were little changed as markets waited for an announcement on the Fed Chair.

Wall Street equities drifted lower with reservations over valuations and lower energy prices. Asian markets posted limited net losses with concerns over growth trends.

The dollar held firm but drifted lower from 16-month highs. EUR/USD found some support below 1.1300 with an element of short covering, but coronavirus reservations persisted. Sterling posted net gains as inflation data reinforced expectations of a December rate hike with GBP/EUR close to 20-month highs.

The Canadian dollar was undermined by the retreat in oil prices, while the Australian dollar recovered from intra-day lows.

The headline Euro-zone CPI inflation rate was confirmed at 4.1% for October, although there was a slight downward revision to the core rate to 2.0% from 2.1%.

ECB Council member Schnabel stated that by continuing to buy bonds, the ECB could signal that a rate hike is not imminent.

Underlying Euro sentiment remained weak, although it secures an element of relief ahead of Wednesday’s New York open with a pause in the selling pressure and it edged back above the 1.1300 level against the dollar. There were still expectations that underlying yield spreads and the dovish Euro stance would undermine the single currency over the medium term with markets also looking to assess the extent of net capital outflows from the Euro area.

US housing starts declined marginally to an annual rate of 1.52mn from a revised 1.53mn previously and slightly below consensus forecasts while building permits increased to 1.65mn from 1.59mn which had little overall impact.

The dollar attempted to post renewed gains after the New York open, but EUR/USD found further support just below the 1.1300 level with an element of short covering on the main crosses.

The US currency was unable to make headway on Thursday as commodity currencies attempted to stabilise, although overall sentiment held firm. EUR/USD traded just above the 1.1300 level with the market reluctant to push the currency lower again without at least a limited correction.

US Treasuries were mixed in early US trading on Wednesday with the 10-year yield settling around 1.63%. Underlying dollar sentiment held firm, although there was tough USD/JPY resistance on approach to 115.0 which helped trigger a limited initial correction, especially with US equities drifting lower during the day.

There was a sharper correction after the European close with USD/JPY sliding to lows just below 114.00 as the yen also gained on the crosses.

Chicago Fed President Evans stated that he is looking for inflationary pressure to recede but will be monitoring the situation well into the middle of 2022.

Markets remained on alert for an announcement by President Biden on whether Fed Chair Powell will be nominated for a second term or whether Brainard will be chosen instead. Sources indicated that an announcement was likely within the next few days.

Asian equities overall tended to drift lower on Thursday, although ranges were narrow with USD/JPY edging higher to around 114.20 and EUR/JPY around 129.15.

Sterling continued to move higher following the latest inflation release with the higher than expected print for the October data triggering fresh unease and reinforcing expectations that the Bank of England would sanction an interest rate hike at the December policy meeting.

Gains did, however, slow later in the day given expectations that higher rates had already been priced into money markets.

Bank of England MPC member Mann stated that short-term inflation expectations were lagging the actual CPI rate and she was confident that people believe that the bank will bring inflation back to the 2% target. She added that goods inflation was expected to moderate during 2022 as supply difficulties ease. There were no direct comments on the outlook for near-term interest rate decisions.

Brexit Minister Frost stated that a deal with the EU over the Northern Ireland protocol could be achieved before Christmas which helped underpin sentiment to some extent, although there were still reservations over underlying tensions and yield trends tended to dominate.

Markets will continue to monitor comments from Bank of England officials in the short term while the latest retail sales data will be released on Friday.

Economic Calendar